BCIS basics: how to use BCIS PAFI in fluctuation clauses

BCIS Price Adjustment Formulae Indices (PAFI) are a widely recognised method of managing inflation risk in construction projects.

They are most commonly used in JCT (Joint Contracts Tribunal) and NEC (New Engineering Contract) forms of contract which include provisions that support their use.

BCIS PAFI are primarily used to track changes in construction input costs and to compensate contractors or subcontractors for inflation-related increases over the course of a project.

Below is a more detailed explanation of how applications of BCIS PAFI work in practice.

A brief guide to using BCIS PAFI

In simple terms, BCIS PAFI are selected to correspond with the work packages or resources within a project and are then used to track inflation in the cost of those items at regular valuation periods.

The principle of selecting and applying BCIS PAFI is relatively straightforward.

Once a contract has been awarded and a fluctuation provision has been agreed, the contracting parties (for example, client and contractor, or contractor and subcontractor) will agree which indices will be used to measure inflation. This approach is more commonly applied on civil engineering contracts.

These indices should reflect relevant work packages or resources required to deliver the project.

Indices are often identified from the BCIS service and specified against corresponding elements within the contract. The parties will also agree:

• the base date from which future cost movements will be measured
• the frequency of price adjustments
• the proportion of the contract sum that will be subject to adjustment
• the mechanism for applying any resulting inflation adjustments

Price adjustments are calculated periodically by comparing the latest published index values with the agreed base index values. The percentage change is applied to the relevant proportion of the contract value that is subject to fluctuation.

BCIS provides indices for both individual resources and work categories.

Work category indices (most commonly indices from the building PAFI series in the BCIS service) are already weighted to reflect the typical proportions of labour, materials and plant associated with the relevant type of work. As a result, they can be directly linked to the cost of the corresponding work package, removing the need for parties to develop and maintain their own resource weightings.

In some cases, parties may prefer to create a bespoke composite index tailored to a specific work package. This involves combining individual labour, material and plant resource indices (available within BCIS PAFI) using agreed weightings.

Alternatively, individual resource indices may be used independently where a more granular measure of inflation is required.

Using BCIS PAFI in JCT Contracts

JCT contracts include optional mechanisms for managing the impact of inflation, known as fluctuation provisions (or indexation provisions). These allow adjustments to the contract sum to reflect changes in certain costs during the contract period.

There are three fluctuation provisions available:

• Option A – permits adjustments to the contract sum where there are changes in taxes payable on materials and goods, or changes in contributions, levies, or taxes payable by employers in respect of their workforce.
• Option B – permits adjustments where the market prices of materials and goods and/or labour costs change during the contract period.
• Option C – permits adjustments using published indices in accordance with the JCT Formula Rules.

Where Option C is selected, BCIS PAFI are often used as the standard basis for calculating price adjustments.

Option C is available within the JCT Standard Building Contract and JCT Design and Build Contract suites, as well as relevant subcontract and management contract forms.

The JCT Formula Rules provide two methods for calculating fluctuation adjustments.

Under the Work Category method, specific elements of work (for example, brickwork or stonework) are allocated to corresponding work category indices within the relevant BCIS PAFI series.

The contract documentation should clearly identify which index applies to each work element.

During each valuation period, a fluctuation adjustment is calculated for each specified work category. Any increase in the resulting price adjustment is then paid to, or recovered by, the contractor or subcontractor as appropriate.

Meanwhile, under the Work Group method, a work group can comprise either a single work category or a combination of work categories identified within the contract schedule.

Typically, a single weighted index is created for each work group.

During each valuation period, the value of the grouped work categories is assessed collectively, and the fluctuation adjustment is calculated using the weighted work group index.

The calculation rules for both the Work Category and Work Group methods are detailed and can be complex in practice. Users are therefore encouraged to consult the JCT Formula Rules directly to ensure they fully understand the applicable procedures and requirements.

Using BCIS PAFI in NEC contracts

Under NEC contracts, the main mechanism for managing cost fluctuations caused by inflation is Secondary Option X1.

X1 can be used with the main NEC4 contracts: the Engineering and Construction Contract (ECC), Professional Service Contract (PSC) and Term Service Contract (TSC).

Under this mechanism, one or more indices are selected for corresponding elements in the contract. These are often BCIS PAFI which provide a more robust reflection of construction inflation than generic indices such as the Consumer Prices Index.

Each index is assigned a weighting reflecting the proportion of the contractor’s expected costs that the corresponding element makes up.

A base date is established at the outset of the contract and the value of each selected index at that date becomes the base date index. During each valuation period, the latest published value of the same index is obtained and compared against the base value.

For each indexed cost element, the percentage change between the base date index (B) and the latest index (L) is calculated using the formula (L−B)/B. These changes are then combined to produce a Price Adjustment Factor (PAF), which is applied to the value of work completed to date when calculating the interim payment.

This mechanism is employed differently depending on the contract type, more of which can be understood here.

Should inflation be included in the contract price when BCIS PAFI indices are being used?

Broadly speaking, allowances for inflation should not be built into pricing assumptions if the client and contractor, or contractor and subcontractor, have agreed to use fluctuation provisions and BCIS PAFI.

This is because inflationary risk is captured by the performance of the indices selected and specified in the contract. Under a price adjustment mechanism, payments are adjusted in line with the actual movement of the agreed indices over the course of the project. If costs increase, the contractor or subcontractor is compensated through the fluctuation mechanism.

Find out more about BCIS PAFI and their application by booking a demonstration with our team.

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